Thoughts For a New Year

January 18, 2017

2017 has arrived! Now that we are transitioning into a new year, it is important for us to not only look forward, but also to remember the principles that give us a firm foundation to stand upon. Please take the time to review this letter. We believe that it will give you a fresh reminder of timeless principles and clear lenses from which to view this New Year.

General Principles

In the context of this annual letter, it will be worth reiterating the nature of my philosophy of advice. Generally speaking, my experience has been that successful investing is goal-focused and planning-driven, while most of the failed investing I’ve observed was market-focused and performance-driven.

Another way of making the same point is to tell you that the really successful investors I’ve known were acting continuously on a plan—tuning out the fads and fears of the moment—while the failing investors I’ve encountered were continually (and randomly) reacting to economic and market “news.”

Most of my clients—and I certainly include you in this generalization—are working on multi-decade and even multigenerational plans, for such great goals as education, retirement and legacy. Current events in the economy and the markets are in that sense distractions of one sort or another. For this reason, I make no attempt to infer an investment policy from today’s or tomorrow’s headlines, but rather align clients’ portfolios with their most cherished long-term goals.

I don’t forecast the economy; I make no attempt to time markets; and I cannot—nor, I’m convinced, can anyone else—consistently project future relative performance of specific investments based on past performance. In a nutshell, I’m a planner rather than a prognosticator. I believe my highest-value services are planning and behavioral coaching—helping clients potentially avoid overreacting to market events both negative and positive.

Once a client family and I have put a long-term plan in place, my principle is: if your goals haven’t changed, don’t change the portfolio. My unscientific sense is that the more often people change their portfolios, the worse their results become. I agree with the Nobel Prize-winning behavioral economist Daniel Kahneman, when he said, “All of us would be better investors if we just made fewer decisions.”

From 1980 to 2016, the average annual intra-year decline in the S&P 500 has exceeded fourteen percent1. Yet even without counting dividends, annual returns have been positive in 28 of these 37 years2, and the Index has gone from 106 at the beginning of 1980 to 2,239 at year-end 20163. I believe the great lessons to be drawn from these data are that—historically, at least—temporary market declines have been very different from permanent loss of capital, and that the most appropriate antidote to volatility has simply been the passage of time. I can’t predict that it will always work out this way. I can only fall back on the wisdom of the great investor and philanthropist John Templeton, who said that among the four most dangerous words in investing are “it’s different this time.”

The nature of disciplined investing, as I see it, is the practice of rationality under uncertainty. We’ll never have all the information we want, in terms of what’s about to happen, because we invest in and for an essentially unknowable future. Therefore we practice the principles of long-term investing that have most reliably yielded favorable long-term results over time: planning; a rational optimism based on experience; patience and discipline. These will continue to be the fundamental building blocks of my investment advice in 2017 and beyond.

Current Observations

The year 2016 began with what have been termed the worst first six weeks in equity market history—the S&P 500 declined more than eleven percent from its 2015 close through February 114. On June 24, the market went down nearly six percent in a day and a half following the Brexit vote. And there was a moment, somewhere around 2:00 a.m. eastern time after the presidential election, when I saw the futures on the Dow Jones Industrial Average down 800 points5! Yet despite all that unnerving market volatility, the S&P 500 closed out the year at 2,239. With dividends of about two percent, the market’s total return this volatile year was almost 12 percent6. In a sense, then, the equity market put on a tutorial in 2016, highlighting the wisdom of tuning out shocking current events and the attendant volatility. During such episodes, it seems to me that the best investment advice I can offer is always, “Turn off the television.”

There can be little doubt that the major market unknown in the last third of the year was the U.S. presidential election. Indeed, the pall of uncertainty was so heavy in the run-up to the voting that the S&P 500 managed to close lower on nine straight trading days—a feat it had not accomplished since 19807. Thus, the most important aspect of the election from the market’s perspective may simply be that it’s over. We know the outcome, and that’s no small thing. Because in my experience, what the equity market hates most is uncertainty. It can deal with anything, as long as it knows what it’s dealing with.

It is not at all a political or partisan observation but a simple statement of fact that the incoming presidential administration, enjoying solid majorities in both houses of Congress, is likely to pursue more pro-business, pro-capital, pro-growth policies than the other candidate might have. Everything else being equal—which it almost never is—I believe these policies should tend to be favorable to the long-term equity investor.

Conclusion

Let me conclude by saying that our approach this year is consistent with that of the past. As always, we must maintain a long-term perspective and avoid the pessimistic sensationalism peddled by the media. Our focus is not – nor has it ever been – economic forecasting. Instead, our focus shall forever be investor behavior. Let 2017 be one of many years in which you hold fast to solid investing philosophy and principles and discard the leftovers.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

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